The New Payola: Deals Landlords Cut with Internet Providers

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The New Payola: Deals Landlords Cut with Internet Providers

New York Spencer Platt - GettyImages

When building owners get kickbacks from big providers it’s the tenants who lose

I live in an apartment. Chances are good that you do, too: Tens of millions of Americans live in apartment buildings, and in medium-to-large cities these structures account for between a quarter and a half of all housing units. More people are renting these days than ever before. And when you move into an apartment, you need the essentials: Water. Heat. And Internet access. Water and heat are regulated utilities. But when it comes to Internet access, people in apartments (called Multiple Dwelling Units, or MDUs) often have the worst of both worlds: all the limitations of a utility framework — no competition, no choices — with zero protections for consumers. That means unconstrained pricing. Network operators like Comcast, Time Warner Cable, and AT&T, in cahoots with developers and landlords, routinely use a breathtaking array of kickbacks, lawyerly games of Twister, blunt threats, and downright illegal activities to lock up buildings in exclusive arrangements.

For people in apartments, the “free market” is anything but.

This astounding, enormous, decentralized payola scheme affects millions of American lives. And these shenanigans will only stop when cities and national leaders require that every building have neutral fiber/wireless facilities that make it easy for residents to switch services when they want to. We’ve got to take landlords out of the equation — all they’re doing is looking for payments and deals (understandably: they’re addicted to the revenue stream they’ve been getting), and the giant telecom providers in our country are more than happy to pay up. The market is stuck. Residents have little idea these deals are happening. The current way of doing business is great for landlords and ISPs but destructive in every other way.

All of this is happening despite the fact that fiber-to-the-home access increases rental value and sales value. According to a recent study from the Fiber to the Home Council, fiber to MDUs creates an 8% greater rental value perception and a 2.8% greater sales value perception. And fiber reduces churn: “Renters with fiber optic broadband are 1% less likely to move in the next three months. This would equate to a 4% difference over a full year.”

Webpass is a competitive ISP working to provide gigabit access in San Francisco, San Diego, and three other markets. Its president, Charles Barr, is deeply frustrated: “Tenants want us, but we can’t get in” he says. “The market for Internet access doesn’t work, because there aren’t a lot of choices for people.” Without permission from a landlord, a competitive ISP can’t enter the building to provide service. But the landlords are locked up. “There’s got to be a way around this,” Barr says, and he’s asking for a new compact among cities and ISPs that would ensure this access happens — what he’s calling an “Internet Franchise” — a set of standardized city ordinances and statutes aimed at giving residents choices. If a consumer wants access to a service, then that provider should be able to get into the building, subject to reasonable technical limitations. (After I interviewed Barr, Webpass was acquired by Google Fiber.)

Webpass and other competitive ISPs are seeing routine demands by developers and landlords for revenue sharing agreements and “door fees”: many Real Estate Investment Trusts (REITs) won’t let you in the door unless you agree to share revenue with them. There’s a whole layer of intermediaries out there who have developers or REITs as clients and aggressively market “opportunities” for buildings to make additional revenue streams stemming from de facto exclusive Internet access agreements, and manage and drive arrangements in the residential real estate market. Completely unprincipled and potentially unlimited demands for paybacks are the result. Here’s an example of a graduated revenue sharing arrangement Comcast pitched in Philadelphia that provides a property owner with increased rewards based on the number of subscriptions in the building.

Slide from presentation to landlords detailing loot they can get from pushing Comcast to tenants.(On the commercial real estate side, it’s the same deal: landlords, their interests aggregated and managed by third-party intermediaries, all have their hands out when it comes to Internet access service. This “riser management” is a huge problem for the great city of New York; it’s why commercial tenants in NYC pay through the nose for awful Internet access service in the fanciest of commercial buildings.)

Now, the FCC has tried to encourage competition in MDU buildings, Eight years ago, FCC clearly said landlords can’t have exclusive agreements with Internet access providers. The FCC recognized the problem:

‘Incumbent providers commonly engage in a flurry of activity to lock up MDUs and other real estate developments in exclusive arrangements as soon as it becomes clear that a new entrant will be coming to town.’ Sometimes these clauses are inserted in fine print, in “legalese,” and without adequate notice to the MDU owner.

But the Commission has been completely out-maneuvered by the incumbents. Sure, a landlord can’t enter into an exclusive agreement granting just one ISP the right to provide Internet access service to an MDU, but a landlord can refuse to sign agreements with anyone other than Big Company X, in exchange for payments labeled in any one of a zillion ways. Exclusivity by any other name still feels just as abusive.

Here’s Barr: “The FCC’s rule is nonsensical. They’re saying you can’t have exclusive agreements, but, at the same time, a landlord gets to say yes or no to anyone coming into the building, and you have to have the landlord’s permission. So, a landlord certainly can sign an agreement with one company and say ‘No’ to everybody else, thereby creating an exclusive agreement. So that’s what they do. They’re under no obligation to let everyone in, so they’ll extract a rent payment from one provider.”

Here’s another colorful workaround exploited by the incumbents. Even though exclusive agreements are a no-no, marketing exclusivity is apparently permitted. So AT&T and Comcast and others will sign deals with buildings that require that only their flyers are displayed in the leasing office. No one else is allowed to distribute any competing material — and no events (think wine and cheese party for tenants) can be held by any competing provider on the premises. Here’s a recent letter from Comcast to property owners “reminding” them of “their exclusive marketing arrangements with Comcast/Xfinity in the wake of an effort by Google Fiber to hand out donuts and coffee to tenants.

Drop that Google donut! Comcast’s “exclusive marketing arrangements” with building management bans rivals from contacting tenants or leaving materials on the property.Another common, more serious, exploit: Even though exclusive agreements with buildings are totally illegal, the carriers will nonetheless insert clauses requiring exclusivity in their agreements with MDUs. And then they’ll add little clauses saying “if any part of this agreement turns out to be illegal, you can cut out that portion of the agreement and the rest of it will stand.” (Lawyers call these “severability” clauses.) If you’re a property manager, you’ll read that contract, see that it’s been signed by someone higher up the food chain than you, and then enforce the exclusivity it appears to require. “Property managers don’t know,” Barr points out. “They’re not experts in Internet law. They’re experts in how to run a property, and they will do what these agreements say. What property manager wants to be the guy to take on Comcast? Not too many.”

How about this one: FCC long ago created “inside wiring” rules giving power to MDU owners, under certain circumstances, to take ownership of wires run by cable companies inside their buildings. The commission recognized that the wiring infrastructure inside an MDU gives the incumbent an unbeatable advantage, and wanted to open up that infrastructure to competition. But those rules were based on the (apparently naive) assumption that, initially, the cable/telco company owned the wires. Clever Time Warner Cable lawyers and many others have worked around this by deeding ownership to their inside wires to the building owner, and then getting an exclusive license back from the owner to use those wires.

This tricky Time Warner deeding switchback apparently satisfies the law while still blocking competition.See? No one said the OWNER couldn’t agree to license its wires to a single player. Got to take your lawyerly hats off to these guys — they’re good.

Shenanigans are everywhere. The Internet should be really mad about this.

But after we get mad — and we should — let’s fix this.

For new buildings, every city should do what Stockholm, Paris, Brentwood, CA, and Loma Linda, CA do. Require those new buildings to be fiber-ready so any competing provider can get in there without asking permission.

For existing buildings, stop companies from being able to sign contractual provisions limiting access to inside wiring. Make it illegal for landlords to get any form of side payment whatsoever for cutting off our choice of ISPs.

And do as much as possible to get dark fiber as deep as possible into neighborhoods, available for lease at reasonable prices, and connected to a common one-stop-shop interface so that all competing cellular wireless and WiFi services can share that dark fiber.

Get on it, AGs of America, national leaders, mayors, and citizens. It’s payola. It’s pernicious. And we’re all paying for it.